- GBP/USD re-surfaced above 1.3200 on Wednesday amid risk-on sentiment.
- The Fed's interest rate outlook is nailed on the ceiling as the market expects a 50bps cut.
- UK CPI inflation and the Bank of England's interest rate outlook will also be on the agenda this week.
GBP/USD broke into higher territory on a quiet Monday, with bullish buying once again above 1.3200 as a new trading week kicks off. Investor sentiment remains stable at higher levels as the market looks ahead to significant central bank policy announcements this week, including a widely expected Fed rate cut and further policy announcements from the Bank of England (BoE).
U.S. retail sales are due to be released on Tuesday, but the big data points that normally cause some volatility are not expected to change much this week unless the results diverge significantly from expectations. U.S. retail sales growth is expected to slow to 0.2% month-on-month in August from 1.0% in July, while core retail sales (excluding auto purchases) are expected to ease to 0.3% month-on-month from 0.4%.
Forex Today: US data in focus ahead of FOMC meeting
In the UK, Consumer Price Index (CPI) inflation is due to be released early on Wednesday morning, with the annualised rate through August expected to remain stable at 2.2% year-on-year. As with US retail sales, this standalone figure is not expected to drive much of a market reaction, provided it falls within a reasonable range of market forecasts' median.
Investors say the Fed is almost certain to begin a new rate-cutting cycle on Wednesday, and the question now becomes not when, but how much to cut. According to CME's FedWatch tool, interest rate traders see about a 60% chance that the Fed's first rate cut in four years will be a 50 basis point reduction in the federal funds rate, with the remaining 40% expecting a more modest 25 basis points. The interest rate market is also pricing in a total of 125-150 basis points of cuts by the end of the year, with interest rate traders seeing about an 80% chance that the fed funds rate will reach a total of 400-425 basis points by December 18, compared to the current 525-550 basis points.
The Bank of England is also due to make its own interest rate announcement on Thursday, but it is expected to attract less attention than the Fed's. The Bank of England is expected to leave its key benchmark interest rate unchanged at 5.0% this week, with its Monetary Policy Committee (MPC) expected to vote 7-2 to keep it that way. In the Bank of England's last policy announcement, the vote was 5-4 in favor of a quarter-point cut.
GBP/USD Price Prediction
Monday's 0.6% surge in GBP/USD has lifted the pair back above 1.3200, and the daily candle continues to move back into higher territory, with multi-year highs just above 1.3250.
Despite the overall bullish trend, GBP/USD price action is at risk of falling into a bull trap, with the pair holding strong with a 1.66% technical recovery from the previous swing low to the 1.3000 level.
GBP/USD daily chart
Frequently asked questions about the British pound
The Pound Sterling (GBP) is the world's oldest currency (886) and the official currency of the United Kingdom. According to 2022 data, it is the fourth most traded currency in the world by foreign exchange (FX) volume, accounting for 12% of all transactions, reaching an average of $630 billion per day. The main trading pairs are GBP/USD (also known as “Cable”), which accounts for 11% of FX, GBP/JPY (3%), known among traders as the “Dragon”, and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The most important factor affecting the value of the British pound is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary goal of “price stability” – a stable inflation rate of around 2%. Its main tool for achieving this is by adjusting interest rates. If inflation is too high, the Bank of England will try to contain it by raising interest rates, making it more expensive for individuals and businesses to obtain loans. Higher interest rates are generally a positive for the British pound, as they make the UK a more attractive place for investors around the world to park their funds. If inflation is too low, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to make credit cheaper and encourage businesses to borrow more to invest in projects that generate growth.
Data released measures the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of the British pound. A strong economy is good for the British pound. Not only will it attract more foreign investment, but it may also encourage the Bank of England to raise interest rates, which will directly strengthen the British pound. On the other hand, weak economic data can cause the British pound to fall.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between the income a country makes from exports and the amount it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only benefit from the additional demand created by foreign buyers looking to purchase these goods. So, if the trade balance is positive, the currency will be stronger and vice versa if it is negative.
